Kassem v Zhang [2008] NSWSC 1287 | Case summary

3285/08 OZEM AZZAM KASSEM & ANOR AS LIQUIDATORS FOR DELTA MORTGAGE FINANCE PTY LIMITED v OLIVER ZHANG JUDGMENT 1 The plaintiffs are Mr Kassem and Mr Juratowich, the liquidators of Delta Mortgage Finance Pty Ltd. I shall refer to them as "the liquidators" and the company as "Delta". 2 By their originating process filed on 17 June 2008, the plaintiffs make (or purport to make) an application under s 588FF(1) of the Corporations Act 2001 (Cth). That section begins: "Where, on the application of a company's liquidator, a court is satisfied that a transaction of a company is voidable because of s 588FE, the court may make one or more of the following orders: …" 3 The defendant (Mr Zhang) was a director of Delta. The order sought against him by reference to s 588FF(1) is an order that he pay $113,508.13 to Delta. It is said that such an order is warranted because of a transaction entered into by Delta in favour of Mr Zhang. It is alleged that the transaction is within one or more of the categories of voidable transaction referred to in s 588FE. 4 Before me for determination are competing interlocutory processes. Mr Zhang, as defendant, seeks an order that the originating process be dismissed. The liquidators, as plaintiffs, seek by interlocutory process filed on 6 November 2008 leave to amend the originating process. 5 It has become common ground that the period of three years referred to in s 588FF(3) had expired more than a month before the originating process was filed and that no order extending extension time under s 588FF(3)(b) has been (or can now be) made. Section 588FF(3) is in these terms: "An application under subsection (1) may only be made: (a) during the period beginning on the relation-back day and ending: (i) 3 years after the relation-back day; or (ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company; whichever is the later; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period." 6 The originating process was, as I have said, filed on 17 June 2008. The "relation-back day" was 2 May 2005. 7 A threshold question concerns the status of a purported application under s 588FF(1) made after the expiration of the limitation period applicable under s 588FF(3). 8 In the joint judgment of Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J in Gordon v Tolcher [2006] HCA 62; (2006) 231 CLR 334, it was said at [37]: "The provision in sub-s (3) of s 588FF as to the time of the making of the application is of the essence of the provision made by s 588FF; it is not to be characterised merely as a time stipulation of a procedural nature." 9 There was then a footnote: "See Rudolphy v Lightfoot [1999] HCA 61; (1999) 197 CLR 500 at 507-508 [11] - [12]; Agtrack (NT) Pty Ltd (t/a Spring Air) v Hatfield [2005] HCA 38 ; (2005) 79 ALJR 1389 at 1398 [51], 1399 [54]; [2005] HCA 38; 218 ALR 677 at 689, 690." 10 In the first of the footnoted cases, Rudolphy v Lightfoot [1999] HCA 61; (1999) 197 CLR 500, it was held that a requirement that a petition disputing an election be filed within 40 days after return of the writ imposed a condition that was of the essence of the right to dispute. It was said that a petition filed more than 40 days after the return of the writ was incompetent and should be dismissed. 11 In the second footnoted case, Agtrack (NT) Pty Ltd (t/a Spring Air) v Hatfield [2005] HCA 38; (2005) 223 CLR 251, it was confirmed (at [51]) that a limitation period in the Warsaw Convention imposed a condition that was of the essence of the right to damages, rather than providing no more than a bar to the enforcement of an existing right. 12 The footnoted references to these two cases in Gordon v Tolcher make it clear that, in the case of s 588FF also, failure to commence action within the specified period means that an essential ingredient of the right of action the section creates is lacking, with the result that an application purportedly made after the end of the period is incompetent and must be dismissed. The competing applications before me must be approached on that footing. 13 Accepting that the liquidators' originating process must be dismissed, it becomes necessary to consider whether the application to amend can somehow overcome that result. 14 The cause of action the liquidators say should be allowed to be advanced by way of amended originating process is based on alleged breach by Mr Zhang of duties owed by him as a director of Delta. The allegation is, in substance, that Mr Zhang, by causing or permitting Delta to undertake the transaction said by the liquidators to ground their entitlement under s 588FF, acted in a way that entailed breach of duties to which he was subject by reason of ss 181 and 182 of the Corporations Act and corresponding or analogous general law duties. The facts relied upon originally in relation to the s 588FF claim are also relied upon in relation to the alternative breach of duty claim. 15 The matter of amendment is dealt with by s 64 and s 65 of the Civil Procedure Act 2005. Even recognising the most comprehensive operation of those provisions, this case is not one in which amendment can or should be allowed. 16 The present plaintiffs are the liquidators. The cause of action upon which they sue is unavailable in the way to which I have referred. By this I mean that an essential element of the right they assert is absent so that the right does not exist. 17 The liquidators do not themselves assert any alternative cause of action of their own against Mr Zhang. Rather they say that Delta, the company of which they are liquidators, has a cause of action against Mr Zhang arising out of the same facts. The situation is thus one in which the liquidators will abandon their claim and Delta will initiate a new claim. 18 The purpose of s 64 and s 65 is to ensure that the dispute brought before the court by the plaintiff is framed in such a way and against such persons as will ensure that its true scope is properly delineated. If that plaintiff is not a party to the dispute and cannot assert any right relevant to it, he or she cannot, under the guise of amendment, discontinue the proceedings that have been commenced against the defendant and inject some new plaintiff who wishes to agitate some different claim against the same defendant, even if that different claim is based on the same facts. 19 It may well be that, if a person who later turns out to be the wrong plaintiff sues upon a particular cause of action, the court's power to allow amendment will extend to correction of the mistake so that the correct plaintiff is substituted and thereby enabled to pursue the cause of action: see, for example, McInnes v Wingecarribee Shire Council (1987) 10 NSWLR 660 concerning a provision of rules of court similar to s 64 and s 65 of the Civil Procedure Act and Hughes v Pump House Hotel Co Ltd (No 2) [1902] 2 KB 485. In the McInnes case, Priestley JA said at 667: "The intention was to make the appellant a person from the class of available persons. Mr McInnes was thought to be such a person but was not. Thus I think the first of the two questions must be answered yes; there was a mistake in the name of a party." 20 It was possible, in the McInnes case, for that conclusion to be reached by reference to the nature and scope of the claims made and the relief sought: see also Greenwood v Papademetri [2007] NSWCA 221 at [69]. 21 No similar conclusion is available in the present case. The claims made and the relief sought are those related to s 588FF. The liquidators are, in that context, the correct and only competent plaintiffs. It is only when the nature of the claims and the relief sought is itself altered that Delta comes to be seen as the correct and only competent plaintiff. Delta is then the correct plaintiff, to the exclusion of the liquidators, in respect of a quite different cause of action, albeit one based on the same facts. 22 Mr Parsons of counsel, who appeared for Mr Zhang, referred to the decision of McLelland J in Knight v McCann-Erickson Pty Ltd (unreported, NSWSC, 26 August 1991). It was there observed that a power to allow joinder of "a person whose joinder as a party is necessary to ensure that all matters in dispute in the proceedings may be effectually and completely determined and adjudicated upon" did not "authorise the reconstitution of proceedings by the substitution of a new plaintiff with a new cause of action for an old plaintiff whose cause of action is no longer maintainable". That statement was endorsed by Young J in Ivymere Pty Ltd v Cooloombla Pty Ltd (No 2) (unreported, NSWSC, 25 August 1997) and by McDougall J in Rickard Constructions Pty Ltd v Moretti [2004] NSWSC 1041; (2004) 188 FLR 278. The approach taken by McLelland J must be taken here also. 23 Because on the view I take ss 64 and 65 are unavailable to produce the result the liquidators seek, the outcome will be that the liquidators' application for leave to amend is dismissed. It will then follow that the originating process will also be dismissed. This will be, of course, without prejudice to the ability of Delta to institute new and separate proceedings against Mr Zhang alleging breach of directors' duties. 24 It remains to consider the question of costs. It was submitted on behalf of Mr Zhang that the liquidators should be ordered to pay Mr Zhang's costs and that it should also be ordered that the liquidators not recover those costs out of the assets of Delta. 25 The liquidators cannot, in my view, resist a costs order, given that they are themselves the plaintiffs and that they will suffer both dismissal of their application to amend and summary disposal of their incompetent originating process: see, for example, Re Buena Vista Motors Pty Ltd [1971] 1 NSWLR 72. The assets of the company in liquidation will be applicable towards the liquidators' liability for costs if those costs are "expenses (except deferred expenses) properly incurred by a relevant authority": see s 556(1)(a) and s 556(1)(dd). 26 The words "properly incurred" no doubt exclude situations where a liquidator brings proceedings which are frivolous or patently hopeless and suffers a costs order when they are dismissed accordingly: see, for example, Re Silver Valley Mines (1882) 21 ChD 381 cited with approval by Campbell J in Hypec Electronics Pty Ltd v Mead [2004] NSWSC 731; (2004) 61 NSWLR 169 and by Hodgson JA in Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 382. Jessel MR there said that the cases in which a liquidator might be deprived of costs for misconduct are more numerous than those in which the same course may be taken against a gratuitous trustee. The description "blunder" was applied to both. 27 Cotton LJ said (at 392): "He is a person appointed by the Court to do a certain class of things; he has some of the rights and some of the liabilities of a trustee, but is not in the position of an ordinary trustee. Being an agent employed to do business for a remuneration, he is bound to bring reasonable skill to its performance, and, though as a general rule he is entitled to his costs out of the estate, he may be deprived of them, not only on the grounds on which an ordinary trustee might be deprived of them, but on the ground that he has not exercised a reasonable amount of skill." 28 I am of the opinion that, in commencing and continuing with the s 588FF proceedings, the liquidators engaged in conduct which involved a "blunder" and a lack of a reasonable amount of skill, although I acknowledge that the deficiencies may, in an immediate sense, have been those of their lawyers rather than themselves. 29 The fact that the s 588FF limitation period had expired before the proceedings were commenced was obvious. It was raised on behalf of Mr Zhang in August 2008, following filing of the originating process on 17 June 2008 (I am not able to say when the originating process was served, although an appearance was filed on 15 July 2008). 30 By letter dated 2 September 2008, the liquidators' solicitors argued that the originating process had been filed within time. They referred to the making of a winding up order on 17 June 2005 upon a winding up application filed on 2 May 2005 and said that, pursuant to s 513A, the winding up was taken to have commenced on 17 June 2005, the date of the making of the order, which date was also the "relation back day". In a letter dated 21 October 2008, Mr Zhang's solicitors pointed out (correctly) that the relation back day, as defined by s 9, was the date of the filing of the winding up application (2 May 2005), not the date of the making of the order. 31 From the outset, it seems, the liquidators worked according to a fundamental misunderstanding of a simple legal point that should have been readily appreciated by anyone with a grounding in the relevant principles. 32 The case is one in which the costs incurred in pursuing proceedings that were (and should have been seen to be) doomed to fail from the outset were not "properly incurred". 33 There is then a question about the costs of the amendment application. In that case, there was, I suppose, a genuine attempt to retrieve what had come to be recognised as a hopeless situation. Although the attempt has been unsuccessful, I do not think it can be said that it was, in the same way, manifestly doomed to fail. 34 The orders of the court are as follows: 1. Order that the plaintiffs' interlocutory process filed on 6 November 2008 be dismissed. 2. Order that the originating process be dismissed. 3. Order that the plaintiffs pay the defendant's costs of the whole proceedings. 4. Order that the plaintiffs not treat as within s 556(1)(a) or s 556(1)(dd) of the Corporations Act 2001 (Cth) costs for which they are liable under order 3, except costs of and incidental to the interlocutory process filed on 6 November 2008. **********

Kassem v Zhang

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